Chapter 9 Regional Economic Integration

Costs of NAFTA

-Jobs could be lost and wage levels could decline in the U.S. and Canada. -Mexican workers could emigrate north. -Pollution could increase due to Mexico's more lax standards. -Mexico would lose its sovereignty.

Benefits of NAFTA

-Mexico: --increased jobs as low cost production moves south and more rapid economic growth -The U.S. and Canada: --Access to a large and increasingly prosperous market and lower prices for consumers from goods produced in Mexico --U.S. and Canadian firms with production sites in Mexico are more competitive in world markets

Success of NAFTA

-Trade between the three countries increased by 250%. -The members have become more integrated. -Productivity has increased in member nations. -Employment effects have been small. -Mexico initially became more politically stable, but drug related violence remains a problem.

Levels of Economic Integration

1. Free Trade Area 2. Customs Union 3. Common Market 4. Economic Union 5. Political Union

Impediments to Integration

1.) It can be costly - while a nation as a whole may benefit from a regional free trade agreement, certain groups may lose. 2.) It can result in a loss of national sovereignty

Political Union Example

50 states of the USA

CARICOM (1973)

A customs union between English-speaking Caribbean countries. Six members formed the Caribbean Single Market and Economy (CSME)(2006) to lower trade barriers and harmonize macro-economic and monetary policy.

North American Free Trade Agreement (1994 U.S., Canada, Mexico)

Abolished tariffs on 99% of goods traded. Removed barriers on the cross-border flow of services. Protects intellectual property rights Application of national environmental standards. Established two commissions to impose fines and remove trade privileges when environmental standards or legislation involving health and safety, minimum wages, or child labor are ignored.

Regional Economic Integration

Agreements between countries in a geographic region to reduce tariff and non-tariff barriers to the free flow of goods, services, and factors of production between each other. Ex. NAFTA-U.S., Canada, & Mexico.

Optimal Currency Area

An area where similarities in the underlying structure of economic activities make it feasible to adopt a single currency and use a single exchange rate as an instrument of macro-economic policy.

Customs Union

Andean Pact

Coal Steel

Before The EU existed there was the European ______ and _______ Community formed in 1951. Then The Treaty of Rome established the European Economic Community in 1957, Later changed to EU in 1994.

Andean Pact

Bolivia, Columbia, Ecuador, and Peru Customs Union

Mercosur

Brazil, Argentina, Paraguay, and Uruguay Common Market

Political Case for Integration

By linking countries together, making them more dependent on each other, and forming a structure where they regularly have to interact, the likelihood of violent conflict and war will decrease. By linking countries together, they have greater clout and are politically much stronger in dealing with other nations.

The Maastricht Treaty

Committed EU members to adopt a single currency, the euro. It is used by 18/28 member states. Created the Euro Zone, 2nd largest currency zone in the world after the U.S. Dollar. Britain, Denmark, and Sweden opted out of the Euro Zone.

Mercosur

Common Market

Harmony

Common Market is Difficult to achieve and requires significant __________ among members in fiscal, monetary, and employment policies

Central American Common Market

Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic. The U.S. Joined in 2004 to create the _________ .

Sovereignty

Economic Union involves sacrificing a significant amount of national ________

Economic Union

European Union

Blocs

European Union is expected to become a superpower of the same order as the United States. It has 2 Trade _____: The EU with 28 members and the EFTA with 4 members.

Mercosur (1988)

Free Trade pact between Brazil and Argentina, and now includes Paraguay and Uruguay. Successful at reducing trade barriers between member states. Critics worry that _________ may be diverting trade rather than creating trade, and local firms are investing in industries that are not competitive on a worldwide basis. Venezuela joined in 2006, but is not yet a full member.

NAFTA

Free trade area

Economic Integration

Generally, many groups within a country oppose the notion of _____________ ____________.

Customs Union (2)

Level of Economic Integration that eliminates trade barriers between member countries and adopts a common external trade policy. Ex. Andean Community (Bolivia, Columbia, Ecuador, and Peru).

Economic Union (4)

Level of Economic Integration that involves the free flow of products and factors of production between members, the adoption of a common external trade policy, and in addition, a common currency, harmonization of the member countries' tax rates, and a common monetary and fiscal policy. Ex. European Union (EU).

Free Trade Area (1)

Level of Economic Integration where all barriers to the trade of goods and services among member countries are removed, but members determine their own trade policies with regard to nonmembers. Ex. NAFTA, EFTA (Norway, Iceland, Liechtenstein, and Switzerland).

Political Union (5)

Level of Economic Integration where independent states are combined into a single union. This Requires that a central political apparatus coordinate economic, social, and foreign policy for member states. Ex. United States... EU is heading here.

Common Market (3)

Level of Economic Integration where there is no barriers to trade between member countries, a common external trade policy, and the free movement of the factors of production. Ex. Mercosur (Brazil, Argentina, Paraguay, and Uruguay) hopes to achieve this status.

Further

Most countries that enter a customs union desire _______ integration in the future

EFTA

Norway Iceland Liechtenstein Switzerland

Trade Diversion

Occurs when higher cost SUPPLIERS within the free trade area replace lower cost external suppliers.

Trade Creation

Occurs when low cost PRODUCERS within the free trade area replace high cost domestic producers.

Between

Regional Economic Integration could be a bad thing, some are concerned that the world is moving toward a situation in which a number of regional trade blocks compete against each other. Then gains from free trade within blocs could be offset by a decline in trade ___________ blocs.

Case Against Integration

Regional Economic Integration only makes sense when: -Amount of trade it creates>amount it diverts.

Economic Case for Integration

Regional economic integration is an attempt to achieve additional gains from the free flow of trade and investment between countries beyond those attainable under international agreements such as the WTO. Since it is easier to form an agreement with a few countries than across all nations, there has been a push toward regional economic integration .

European Union

The _________ _______ is the result of: --The devastation of two world wars on Western Europe and the desire for a lasting peace. --The desire by the European nations to hold their own on the world's political and economic stage .

Andean Community (1969)

The agreement had more or less failed by the mid-1980s. In the late 1980s, Latin American governments began to adopt free market economic policies. In the 1990s, the Andean Pact was re-launched, and now operates as a customs union. In 2003, it signed an agreement with Mercosur to restart negotiations towards the creation of a free trade area. Current members include Bolivia, Ecuador, Peru, and Columbia.

Limited

There have been attempts at regional economic integration throughout Asia and Africa but success has been ________. The most significant efforts are the Association of Southeast Asian Nations and the Asia-Pacific Economic Cooperation.